KKR’s Kravis more bullish on deals, firm eyes bigger North America fund

With energy and other commodity prices reeling, and buyout opportunities emerging, the firm sees more opportunity now than in recent quarters.

“If you look at our history, for almost 40 years now, the more dislocation and the more volatility, the better we’ve done,” Henry Kravis, the firm’s co-founder, said on a conference call with Wall Street analysts. “Now we’re in even better shape because we’re global and we can invest around the world.”

Kravis said it’s tougher to invest when prices are higher, but levels have come down in a number of sectors. “It’s become more interesting for us,” he said.

On the fundraising front, KKR said it has started work to raise North America Fund XII. Since North America Fund XI has turned in top-quartile results, North America Fund XII is expected to draw in more capital, the firm said. Market sources have put the target for the newer fund at $10 billion.

KKR said it will probably activate Fund XII in 2016 or possibly 2017, since it has about $4 billion in uncalled commitments for North America Fund XI.

KKR also confirmed that it is raising its first growth equity fund to take minority stakes in more rapidly expanding companies. Its fundraising machine is also drawing commitments for its Europe IV fund, Special Situations II, KKR Asian Fund II, and KKR Real Estate Partners Europe, as well as its hedge fund strategies.

Turning to the credit markets, Scott Nuttall, head of Global Capital and Asset Management, said KKR is still able to raise financing for new transactions, but banks are less generous with credit in the face of a “bifurcated” leverage market.

“Leveraged finance markets in the U.S. are a little bit more tricky,” Nuttall said. “If it’s a good-quality deal, it’s easy to get done. If it’s a story deal with a lot of leverage, it’s much more challenging.”

KKR’s private credit unit has increased its deployment of late as banks have pulled back, he said.

Kravis and George Roberts, co-CEOs who launched KKR decades ago, spent time on the call explaining why the firm introduced a fixed dividend of 16 cents a share, below its recent varied dividend payments that have ranged from 35 cents in the third quarter to 45 cents in the year-ago quarter.

KKR also announced that it will start buying back about $500 million in stock.

The firm expects the smaller dividend payments and stock buyback to free up more capital to use on deals and to boost its profits over time.

”We will use incremental retained capital to invest behind our ideas and buy back our units,” KKR said. “Over time, we think the market will value what we do with our balance sheet, including repurchasing our own units, more than the variable distributions we have been paying.”

Q3 results

KKR reported a GAAP loss of $190.6 million for the third quarter ended September 30 and GAAP net income of $456.2 million for the first three quarters of this year, down from $89.9 million in Q3 2014 and $478.2 million in the first nine months of 2014.

The firm’s economic net income (ENI) was negative $286.0 million for Q3 and $1,153.3 million for the nine months ended September 30, down from $508.7 million in Q3 2014 and $1,640.6 million in the first nine months of 2014.

ENI after taxes per adjusted unit was negative 37 cents for the quarter and $1.13 for the nine months ended September 30, down from 50 cents in Q3 2014 and $1.81 in the first nine months of 2014.

Assets under management and fee paying assets under management totaled $98.7 billion and $82.9 billion, respectively, as of September 30, KKR reported.

Action Item: See KKR’s third-quarter financial report here: http://bit.ly/1GHqnDd